OTTAWA --- the Federal Conservative government is expected today to introduce new rules aimed at toughening up mortgage lending in a bid to curb the record household debt levels in this country.
The key change Finance Minister Jim Flaherty is likely to unveil is a cut in the maximum amortization period, to 30 years from 35 years.
Mortgages with amortization periods longer than 30 years will no longer qualify for government-backed mortgage insurance, which is required for buyers with less than a 20 per cent down payment on a home.
Government sources also told the National Post that Flaherty is expected to lower the maximum amount Canadians can borrow against the value of their homes, to 85 per cent from 90 per cent, and remove federal-government backing of home-equity lines of credit, or so-called HELOCs.
The sources, who spoke on condition of anonymity, add the minimum down payment, at five per cent, will remain as is. Further, the government will not unveil any plan to target condominium purchases by requiring monthly condo fees be added to the list of expenses that is measured against income to decide whether a buyer can afford a mortgage.
The changes to the country’s mortgage rules – the second in as many years – emerge amid rising concern about the record levels of household debt, which, measured as a ration of money owned to disposable income, nears a startling 150 per cent as of the third quarter of last year.
That surpasses the level of debt held by U.S. households, whose appetite for borrowing helped stock the financial crisis of a few years ago.
The Bank of Canada recently warned debt levels are growing faster than income, adding the risk posed by consumer indebtedness to the domestic economy would continue to escalate without a “significant change” in how consumers borrow and banks lend.
Bank of Canada governor Mark Carney said policymakers have a “responsibility” to look at the benefit of pre-emptive action. Joining the chorus have been chief executives at the big banks, most notably Ed Clark at Toronto-Dominion Bank, in publicly advocating for tougher mortgage standards.
The new changes reduce even further the amount people can borrow against their homes, to 85 per cent.
Also, the changes target HELOCs, which Flaherty cited as a source of concern in a recent interview.
Home-equity lines of credit surged 170 per cent over the past decade, or twice the rate of mortgage growth, and now represent 12 per cent of overall household debt. With the new rules, Ottawa will no longer back the HELOC, as it was doing up until now through mortgage insurance.
Instead, sources say, the government will signal that the banks are on the hook for any default linked to a HELOC it issued.
- Postmedia News.